Businesses that accepted a Paycheck Protection Program (PPP) loan to keep their doors open during the coronavirus pandemic may be asking for another round of forgiveness soon.

They may face liability if U.S. Small Business Administration (SBA) audits determine their business was unable to meet the required “necessity certification,” or should have considered alternative sources of liquidity prior to applying for a PPP loan. More than 4.4 million businesses received loans from the SBA in both rounds of the PPP program.

The PPP’s Necessity Certification and Affiliation Rules

The Coronavirus Aid, Relief and Economic Security Act and subsequent legislation, which has allocated more than $510 billion in relief, made PPP loans available for businesses that, at the time of application:

  • Certified that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant,” otherwise known as the “necessity certification.”
  • Considered access to alternative sources of liquidity “sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business,” prior to applying for the PPP loan.
  • Have 500 or fewer employees, taking into account any and all affiliates. Certain businesses, including portfolio companies of private equity funds, may be at risk that the SBA will interpret their affiliation rules more conservatively than expected.

Severe consequences for submitting false or misleading certifications to the U.S. government could apply to businesses who don’t meet these criteria but received a PPP loan, including fines and treble (i.e. triple) damages.

The SBA has created a safe harbor with respect to the necessity certification for recipients of loans of less than $2 million, but has advised that all PPP loans of $2 million or more are “subject to review by SBA for compliance with program requirements.”

What You Need to Know About PPP Loan Insurance

A few insurers are now offering a policy designed to cover business that are subsequently deemed to be ineligible to receive a PPP loan at the time it was granted to them. A PPP loan insurance policy will cover:

  • Risk that the “necessity certification” was inaccurate when made, as well as the risk of inaccuracy of additional certifications made at the time of the loan application, including employee counts, taking into account the affiliation rules.
  • Losses arising out of the lack of eligibility, including the amount of the loan (if required to be repaid), defense costs, fines, penalties and treble damages.

While the terms and conditions of this coverage are quickly evolving, some policies will not cover the government’s denial of loan forgiveness unless the denial is due to the company’s lack of eligibility at the time it applied for the loan. For example, if the business did not use the PPP loan proceeds according to the SBA requirements, then the policy would not provide coverage. PPP loan policies may also contain exclusions for reputational damages relating to the improper receipt of a PPP loan.

To obtain PPP loan insurance, applicants must submit:

  • Information about relevant affiliates
  • Analysis of how the affiliation rules apply to the business
  • Payroll calculations made in connection with the loan application
  • Analysis conducted to determine the business could make the “necessity certification”
  • Analysis of alternative sources of liquidity
  • Data surrounding the impact of COVID-19 on the business
  • All other materials submitted to the SBA in connection with the PPP loan application

If you are currently considering applying for a PPP loan, or were already granted a loan, consider PPP loan insurance as a way to off-set any potential liability that could surface.

Contact your HUB Broker to discuss your insurance coverage and minimize the potential negative impact of Coronavirus on your business. Get the latest information, guidance and resources on Coronavirus (COVID-19) to help you protect what matters most on our Coronavirus Resource Center.